{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

L2 - Time Value of Money

# L2 - Time Value of Money - Financial Management Fall 2010...

This preview shows pages 1–9. Sign up to view the full content.

Financial Management Fall 2010 Lecture 2: Time Value of Money (TVM) Professor Erica Li Ross School of Business

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Roadmap for today ! Time value of money ! Four important variables & concepts " Future value (FV) " Present value (PV) " Return " What’s their relation?
Time value of money ! TVM: \$1 today is worth more than \$1 promised at some time in the future ! Time value of money comes from the existence of investment opportunities that have positive returns

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Time value of money ! Money at different points in time has different value ! Cash flows at different points in time cannot be compared directly " Can we compare £1 with \$1 without applying the exchange rate? ! To compare cash flows that occur at different points in time, we need to convert them to the dollar amount at the same point in time
Future value (FV) ! Future value refers to the amount of money an investment will grow to, over some period of time at some given interest rate ! How much money will you receive next year if the (rate of) return is 10% and you invest \$100 today? \$100 + \$100*10% = \$110 ! \$110 is called the future value (FV) of the \$100 today at year 1 at (a return of) 10% ! \$110 at year 1 is equivalent to \$100 today at 10%

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
FV in two periods ! How much do you get at year 2 (FV at yr 2) if " you reinvest the \$100 and the interest earned during year 1 " and the return is also 10% from year 1 to year 2 FV 2 = 100*(1+10%)*(1+10%) = 100*(1+10%) 2 The payoff at the end of year 1
Interest on interest !"# !"% !"& ’()*+),-. %## %## %## %# /*!0(01! %# %# % /*!0(01! 2* /*!0(01!

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
Compound vs. simple interest ! You invest \$100 for more than one period (a year, a month, …). If you earn interest on the interest accumulated from previous period(s), it is called compound interest.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}